We use matched employer-employees data for Italy to study the joint response of wages and employment to firm-level shocks. We construct a simple dynamic general equilibrium model of labor demand and supply that allows us to identify separately firing (or internal) and mobility (or external) adjustment costs. We show that the two type of costs cannot be discriminated empirically by looking at labor or wage adjustment separately. Mobility costs have distinctive implications on wage response to firm-level employment changes but they can only be identified with worker-level information on wages. We find that both types of costs are present, but the internal component accounts for a large share of total adjustment costs. Our results are consistent with a labor market where workers are fairly mobile within locations but scarcely mobile across them
More papers in 2006 Meeting Papers from Society for Economic Dynamics Address: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA Contact information at EDIRC. Series data maintained by Christian Zimmermann ().